The American auto industry—an industry that’s been the proud symbol of America’s manufacturing might for a century, an industry that helped to build our middle class—is once again on the rise.” That’s what President Barack Obama told assembled reporters and officials on November 18, 2010, the day after the new General Motors went public, with the largest IPO in American history.

GM sold 478 million common shares at $33 each, as well as a sizable chunk of preferred stock, raising $20.1 billion. While the IPO itself didn’t fully recover the federal government’s post-crash investment in GM (some $50 billion), a complete payoff seemed possible if the stock price rose enough, allowing the government to sell off its remaining stake at a better price. More important, said sober analysts, the stripped-down cost structure, looser union contracts, and management shake-up that preceded the IPO would allow GM to finally shed its decades-old legacy of divisive labor battles and mediocre, gas-­guzzling cars. (As I reported in these pages in 2010, I, too, saw inklings of hope.)

In November 2011, roughly a year later, Treasury revised its estimate of the government’s likely loss upward from $14.3 billion to $23.6 billion. As of this writing, GM’s stock was hovering around $20 a share. The company was beset by reports that the batteries in its splashy new hybrid-electric car had an unfortunate tendency to catch fire. Meanwhile, sales of the Chevy Cruze, which was supposed to be the Corolla-killer, were slipping after a strong initial showing.

This despite the fact that the company’s major Japanese competitors had been crippled by a tsunami and a nuclear meltdown. Business journalists often joke that some struggling firm could be saved only by “an act of God,” but in the case of GM’s stock price, even that hasn’t been enough.

Which has to raise the question: Was the company really saved? Did it finally have its “Come to Jesus” moment? Or was this just one more temporary detour in the company’s erratic amble toward perdition?

Historical precedent offers strong reasons to worry that GM might continue to backslide. Though casual glosses usually present the company’s history as a steady decline from the mighty 1960s to the debacle of 2008, in fact, there were quite a few moments when GM—and Detroit more generally—­appeared to have mended its ways. In 1994, during one of those moments, the reporter Paul Ingrassia published a book called Comeback: The Fall and Rise of the American Automobile Industry. In his 2010 book, Crash Course, he sounds older and wiser:

Throughout the 1980s and 1990s, every time the Big Three and the UAW returned to prosperity, they would succumb to hubris and lapse back into their old bad habits. It was like a Biblical cycle of repentance, reform, and going astray, again and again, as Detroit was repeatedly lured by the golden calves of corporate excess and union overreach.

The cycle reached its peak at the beginning of the new millennium, when the Big Three plunged from record profits to breathtaking losses in just five years. Over the past few decades, GM’s ability to resist change has proved almost uncanny. Why did the company wait so long and do so little—not once, but time and again—before finally falling into bankruptcy? And what, if anything, does that portend for its future? The questions go beyond GM, a company that’s hardly unique. Why did Blockbuster idly watch Netflix destroy its business? Why did Kodak let digital cameras drive a once-mighty industrial giant into penny-stock territory?

Ask Jeff Stibel, and he’ll tell you: because that’s what troubled companies do. Stibel, once an aspiring cognitive scientist in Brown’s graduate program, is now a serial entrepreneur who has led turnarounds at Web.com and Dun & Bradstreet Credibility Corp. “Once the human mind has set out to do something, or has gotten in the habit of doing something,” he told me, changing it is “very hard.” When you add group dynamics, it’s even harder. You don’t need to be a brain scientist, of course, to know that people resist change … and yet, even knowing that, you’d be surprised at how many firms keep driving toward inevitable disaster at top speed. GM’s record is very much the norm, not the exception.

Years ago, I listened to an earnings call with the head of a biotech firm that had sold off the income streams from all its patents, had nothing in its pipeline, and was rapidly burning through its cash. Nonetheless, the CEO kept talking about “our future” as if the company had one, other than liquidation. The equity analysts on the call didn’t seem fazed; apparently, that’s how companies in these situations usually behave. Management and workers seem oblivious to their failures. They wait too long before they act, and even when they do take action, it’s often inadequate.

This dynamic has given rise to a booming industry of turnaround specialists. They range from serial CEOs, like Stibel, who may walk in with an entire senior management team, to more-traditional management consultants. The industry is big enough to support considerable specialization—by company size, by industry, even by technique (cost cutter, brand builder). All seem to agree on one thing: most companies wait far too long to even recognize that they have a problem.

“Typically, a company doesn’t pull someone in until they’re on the brink of disaster,” says Thomas Kim, a Denver-­based turnaround specialist and an officer of the Turnaround Management Association. “They can’t make payroll, can’t make a loan payment, or can’t pay off their loan that’s coming due.” Obviously, if everyone waits until the checks get rubbery, the chances of avoiding the onrushing debacle are slim. But the flip side of the problem, says Michael Buenzow, a senior managing director in the corporate finance and restructuring practice at FTI Consulting, is that unless the crisis is acute, it’s hard to make anything happen. “If you’re brought in too early,” he says, “the employees in the organization won’t have that same sense of urgency.”

And yet, the argument that people continue down dead ends merely because they hate change seems inadequate. After all, people also hate losing their jobs and their money. As economists like to say, most people are risk-averse—it’s why unions accept wage cuts to keep pensions and health-care benefits, and why extended warranties are big business for Best Buy. Firms are full of these mostly risk-averse people. So why do they so commonly refuse to swerve?

One possibility is that firms don’t change because inertia is in their DNA—indeed, it’s a gene that once made many of them successful. In their 1989 book, Organizational Ecology, Michael Hannan and John Freeman argue that organizations are actually selected for inertia by their environment, and “rarely change their fundamental structural features.” Change is risky, after all, since it definitionally involves doing something that isn’t already working—and even product lines that have grown lackluster still have some customers. Firms that are prone to frequent large changes will probably have more opportunities to kill themselves off with bad choices than firms that resist big changes.

Moreover, the need for accountability and reliability in the modern economy selects against constant radical experimentation—people like knowing that their bank has cumbersome and invariable procedures for keeping track of deposits, for instance. Think of McDonald’s, where a core premise is that no matter where you go, the food and decor will be reliably, exactly the same. Or consider what happened to Coke after it tried to change the recipe of its iconic product, even though taste tests showed that most people actually liked the new version better. The larger and older the firm is, the heavier the selection for stability.

This is a powerfully attractive model for explaining why innovation so often seems to be driven by newcomers, rather than by profitable incumbents with huge R&D budgets. It also helps explain why so many companies in turnaround situations are gripped by inertia.

Blockbuster, for instance, promised—­and for a long time delivered—­reliability and ubiquity. Most customers were never more than a few minutes from a bright, clean, spacious store with an ample selection of the latest videos. But eventually that commitment to ubiquity and sameness killed the company. Blockbuster did see the possibilities of streaming, and explored some partnerships to exploit them, but was slow to roll out changes to its core business (as late as August 1999, only 1,000 Blockbuster stores even carried DVDs). Meanwhile, the commitment to ubiquity had caused the firm to take on a mountain of debt to lease all that pricey real estate. At some point, the company needed to leap into the unknown. But by the time its managers all held hands and took the plunge, the clock had run out. Blockbuster’s streaming service, launched in 2004, was far too little, and far, far too late.

Thomas Kim sums up the problem of corporate inflexibility pungently. “There are companies that perform reasonably well, and are completely dysfunctional.” But then the market changes. “In the companies that we see that hit the wall, that dysfunctional corporate culture really becomes a problem.”

Detroit labor relations have been a disaster ever since the early unionization drives, which were acrimonious and at times violent (at the infamous “Battle of the Overpass,” in 1937, a claque of Ford security guards attacked union agitators in front of an assembled press delegation). The result was a poison­ous relationship; in many ways, GM workers were more a part of the United Auto Workers than of GM. Eventually, the union became a sort of shadow management that had to sign off on every production decision the company made, if it had any effect at all on workers.

This system actually worked during the boom years. Because GM’s competitors were unionized too, the UAW’s power kept wages more or less equal across the Big Three, and helped contain cost competition that might have led to price wars, undercutting margins. The UAW, meanwhile, never had to worry that an excessively rich compensation package would put the Big Three in jeopardy.

Conditions changed, but the thinking didn’t. The union frequently behaved like a parasite that didn’t care whether it killed its host—calling strikes just as the company was trying to launch a pathbreaking small car; demanding that GM keep paying surplus workers nearly full salary indefinitely, even as market share declined. Rather than trying to change this dynamic, management caved, again and again—possibly, Ingrassia suggests, because any increase in wages would “trickle up,” as GM strove to maintain a pay differential between management and the hourly workers.

GM’s strategy, which focused first and foremost on sheer scale, also became ineffective over time, yet the company never moved substantially beyond it. Competitors built well-understood brands based on super-reliability, or style and performance, picking off customers year after year. But GM never settled on what it wanted to be, beyond gigantic.

Even a dysfunctional culture, once well established, is astonishingly efficient at reproducing itself. The UCLA sociologist Gabriel Rossman told me, “If new entrants assimilate to whatever is the majority at the time they enter, and if new entrants trickle in slowly, then the founding culture can persist over time, even if over the long run they make up a tiny minority.” This is why Americans speak English even though more of us are ethnically German or Yoruba. In linguistics and sociology, it’s known as the “founder effect.” In corporations, it’s known as “how we’ve always done things.”

Corporate culture, like any other culture, can change, of course. Edward Nieder­meyer, of TheTruthAboutCars.com, who has been a pretty tough critic of GM, thinks that this time may really be different. Finally, he says, “folks over there seem well aware of the ‘old bad habits’ and are trying extremely hard to avoid them.” (Although he is quick to point out that new bad habits could easily emerge.)

David Cole, of the Center for Auto­motive Research, agrees. For one thing, it’s clear that the UAW has come to under­stand that it needs to actively work to keep the auto industry healthy. With membership a quarter of what it used to be, the union is now in worse shape than the Big Three. So it is focused on providing a more flexible, better-skilled workforce. It has also allowed workers’ pay to be tied to the fate of GM.

“One of the things that the UAW never wanted,” says Cole, “was to have an equity position in the company, because they didn’t want the membership to think like investors. Now with the bonus scheme, they’ve essentially got an equity position.”

But then, some questions linger … the scattered complaints that the company is “channel stuffing” (upping its reported sales by getting dealers to take cars they don’t want), the continued reliance on incentives like zero percent financing, and of course, those exploding batteries. Unfortunately, corporate culture is a sort of black box; from the outside, you can’t see what’s going on. You have to wait to see what emerges.

What we can say is that this time, we’re actually going to find out. GM has fixed basically every other problem that anyone could name: Instead of a $2,000-a-car cost disadvantage due in large part to legacy costs such as wages and retiree benefits, it now has a cost advantage. The eight marques that multi­plied the overhead and muddied the value propositions of its brands have been streamlined to four. The excess dealerships have been closed.

What’s left is culture. After everything, if GM begins losing market share again, we’ll know that it’s beyond saving. To paraphrase the old joke: “How many experts does it take to turn around a big company? Only one—but the company has to really want to change.”

Small Dead Animalspoints me to this article at the February 15, 2012 Canadian Financial Post concerning the Canadian government's bailout of GM and Chrysler. (I confess: I did not know that the Canadian and Ontario governments got roped into this idiocy as well as the U.S. government.) The author calculates that the jobs saved in Canada by the bailout were kind of expensive:

After subtracting the partial repayment made by both companies, the governments’ sale of some shares obtained via the bailout, and the present value of GM stock still held by the two governments, taxpayers are still out $810-million on the Chrysler bailout and $4.74-billion on the GM loan. That’s an estimated $5.5-billion loss, which will fluctuate only slightly, depending on the final GM share price when governments relinquish their remaining shares. On jobs, three years later, the current employee count in Canada is 10,000 at GM (down from 12,000 in early 2009) and 9,000 at Chrysler (down from 9,800 in 2009). Using present employee counts, that means taxpayers offered up a $90,000 subsidy per Chrysler employee and a $474,000 subsidy per GM employee. (The company-only estimates are fair calculations; in the absence of GM or Chrysler, lost spinoff jobs at auto-parts manufacturers and dealerships would have been at least partly restored by either the two post-bankruptcy companies or by other automotive companies.) As the author points out, what would have happened if both companies had gone bankrupt, and the employees had fallen into the Canadian safety net? How many years would it have taken for Chrysler's Canadian workers to have been found new jobs? Ditto for GM's Canadian workers? (Especially because Canada, unlike the U.S., is doing okay on job creation.) You could argue about whether those Chrysler workers would have been out of work long enough to consume $90,000 worth of unemployment and government assistance on health insurance. But the GM workers? Even if you threw $50,000 a year into those workers (which sounds generous), it would have taken almost ten years to burn through that subsidy--by the end of which, nearly all of these workers would have found new jobs, reached retirement age, or died.

If the government spends tens of billions of dollars to save tens of thousands of jobs, it means that they are spending a million dollars per job saved. It would be cheaper to just write a $100,000 severance check to each employee, and let them look for new employment.

Three years after being rescued by a taxpayer bailout, General Motors recently announced some rather ambitious profit targets for 2012. But even if it meets these targets—a big if—taxpayers should not wait on one foot to recover their remaining “investment” in the company.

There is no doubt that GM has returned from the brink. It made $8 billion last year, a record high, and regained enough global market share to once again become the world’s biggest automaker, a title it had lost to Toyota. More impressive, it is planning to bump its profit margins from 6 percent last year to 10 percent this year, on par with its best-in-class rivals such as Hyundai and BMW. This, it hopes, will allow it to post $10 billion in profits this year, something that only 17 public companies managed to do in 2010.

How did investors react to all this hope and cheer? With a giant yawn: GM’s stock price, which has been hovering around $25 for months, barely budged. That’s $8 below GM’s IPO price. And it’s $30 below what’s needed for taxpayers to recover the $30 billion they still have stuck in the company.

If investors aren’t buying GM’s rosy scenarios, it’s for some good reasons. Peter De Lorenzo, editor of Auto Extremist, notes that GM is facing the most competitive market in history and investors are dubious that it can deliver. GM’s $8 billion in profits last year resulted partly from the tsunami in Japa that disrupted Toyota and Honda’s global supply chain.

Both are back this year and more formidable than ever. While GM reported a 6 percent drop in January sales in North America from a year earlier, its foreign competitors posted impressive gains. GM will have a hard time matching last year’s performance, let alone upping it if it has even one more month like January, De Lorenzo notes.

Tougher competition in North America is not GM’s only worry. Its sales in China are slowing. Also, Europe will probably remain a trouble spot. GM suffered $2 billion in losses in Europe last year, thanks to Opel, its hopelessly bloated German brand. But GM has been unable to obtain permission from the German government to restructure its labor costs, even as European sales plummet in an economic meltdown.

Toyota and Honda don’t have the same exposure in Europe and hence have less to worry about. What’s more, GM’s global pension obligations are underfunded to the tune of $22 billion, about $10 billion in the United States alone.

If GM manages to address all these issues, notes Sean McAlinden of the Center for Automotive Research, its share price might go up $40 to $45, leaving taxpayers still $5 billion to $8 billion in the red. But that’s under the best scenario. If stock prices remain at the current $25 level, the losses could mount up to $15 billion. That’s not counting the $15 billion in tax write-offs that GM got as part of the bankruptcy deal. All in all, taxpayers are facing somewhere from $20 billion to $30 billion in losses.

That’s not all the exposure that taxpayers will have going forward. The GM bailout has distorted the playing field so badly that its competitors are demanding their own handouts to even things out.

For example, McAlinden notes, the administration gave GM about $10 billion more than was strictly necessary to finance its bankruptcy. The money contributed to GM’s nice $33 billion cash cushion right now. GM could use this money to buy its own stock and bid up prices, mitigating taxpayer losses—or pay dividends. But McAlinden doesn’t believe that’s what GM will do. It could use the money to pay off its obligations to the union health-care trust fund, making this a direct infusion of cash from taxpayers to unions.

Or it will use the money toward product development, putting its competitors at a disadvantage. Moreover, because all but $10 billion of the bailout money GM got was in the form of equity, the company has no debt service costs. Ford by contrast, is still servicing the $23 billion in debt it took to avoid a bailout.

This is unfair, and the Obama administration knows it, which is perhaps one reason it quickly approved a $5.6 billion retooling loan for Ford. That, in turn, elicited howls of protest from Chrysler’s Sergio Marchionne. The administration gave Marchionne’s parent company, Fiat, the majority stake in Chrysler without asking Fiat to contribute a single euro of its own.

Yet Marchionne complains that the administration hasn’t been generous enough. In contrast with GM, it forced Chrysler to service the bailout loan. Now it’s dragging its feet in approving Chrysler’s new retooling loans, he claims.

Bailout supporters maintain that it was a one-time deal necessary to shore up companies in acute economic times. In reality, the rush for the bailout’s spoils has produced ripple effects that may well haunt the economy for a long time.

As President Barack Obama campaigns to keep his job, he will spin the bailout as a success story that saved millions of American jobs. But taxpayers should bear in mind that the hit to their wallets will be substantial and will probably grow in years to come.

General Motors Co. will idle production of its Chevrolet Volt battery-powered car for five weeks beginning this month because of slow sales amid an effort to boost the vehicle's consumer appeal, the company said Friday.

Launched last year with great fanfare, the Volt has had a rocky start as sales stalled, and the car became a lightning rod for critics of the Obama administration's auto-industry bailout and support for alternative energy.

GM said around 1,300 workers at the Hamtramck, Mich., factory where the Volt is built will be out of work between March 19 and April 23, a spokesman said. ...

Chrysler is immune from new punitive-damage claims from any alleged manufacturing defects in vehicles sold before the auto maker’s 2009 government-brokered restructuring.

Chrysler’s legal exemption, approved by a bankruptcy judge, is the product of rules embedded in the federal bankruptcy law. These rules allow sick companies at times to abandon product liability or other risks, overruling state laws that give consumers the right to seek damages.

Specifically, the company’s immunity—which no other car maker has—stems from a clause Chrysler crafted in its 2009 bankruptcy sale to Italy’s Fiat SpA. The exemption applies to more than 28 million cars and trucks.

The legal protection afforded Chrysler, now profitable for the first time in six years, allows the Auburn Hills, Mich., company to “essentially get a free pass on some of their most egregious past mistakes,” said Douglas Laycock, a University of Virginia law professor and punitive-damages expert.

The story includes links to the relevant documents. I’d be curious whether any readers believe there’s any way to challenge these provisions in court.

UPDATE: The VC’s own Todd Zywicki comments:

That WSJ article was weird–it is black-letter bankruptcy law that you can discharge products liability and other tort claims in bankruptcy. The only limitation really is due process, which is if potential claimaints have notice that their claims will be discharged. And what is typical is to basically create a trust out of some of the assets in the case and set those aside for the claimants. And so if you actually own a Chrysler car or buy one used after the date of the bankruptcy then due process is satisfied.

The real anomaly here is actually GM. There for purely political reasons the government allowed claims against GM to pass through bankruptcy. I suspect it is because of the trial lawyers.

Punitive damages are especially disfavored in bankruptcy. They are subordinated to actual damages. So where creditors do not receive their compensatory damages in full–because the debtor is insolvent–it makes no sense to pay punitives before other creditors are paid in full for compensatory damages.

The oddity in these cases is the rigged bidding process. Typically this matters because discharging the claims increases the value of the reorganized company (or the amount that a buyer will pay in a 363 sale). So the real benefit would not go to Chrysler, but rather to Chrysler’s estate, which would thus have more money that it could pay out to creditors as a whole.

By Tim Higgins Bloomberg Jul 29, 2012 5:40 PM CT General Motors Co. (GM) said its head of marketing, who decided to end advertising on Facebook (FB) Inc. and the Super Bowl, resigned as the automaker’s U.S. market share declines.

Chief Marketing Officer Joel Ewanick, is leaving effective immediately, GM said in an e-mailed statement. Alan Batey, vice president of U.S. sales and service, will assume the post on an interim basis, according to the statement. Chief Executive Officer Dan Akerson this month also removed Karl-Friedrich Stracke as head of European operations.

The company, based in Detroit, has lost share in its home market after its 4.3 percent first-half sales gain trailed the 15 percent industrywide increase in light-vehicle sales. The automaker, after posting a record $9.19 billion profit last year, also is struggling to end losses in Europe.

Under Ewanick, 52, the automaker decided in May to end advertising on Facebook after a regular spending review. GM began discussions about resuming ads on the social-network website, two people familiar with the talks said earlier this month. Ewanick also decided not to advertise during the National Football League’s Super Bowl championship game next year on CBS.

GM spent $10 million on paid ads on Facebook last year, a person familiar with the spending has said. That’s a fraction of the about $1.8 billion GM spent in 2011 on advertising in the U.S., according to Kantar Media.

Toyota Surges

The first-half U.S. market share for GM, the largest U.S. automaker, fell to 18.1 percent from 19.9 percent a year earlier, according to researcher Autodata Corp.

GM in 2011 regained the title of the world’s largest automaker by sales after natural disasters in Asia curtailed Toyota Motor Corp. (7203)’s production of vehicles and parts. Toyota surpassed GM in worldwide sales in 2008.

In Europe, GM installed Vice Chairman Steve Girsky as interim president of interim president of the European unit. Stracke, the man he replaced, remains with GM and will perform“special assignments” and report to Akerson, GM said in a statement earlier this month.

Thomas Sedran, a consultant who joined the company’s Ruesselsheim, Germany-based Opel unit in April, was named deputy chief executive officer. Sedran is leading Opel until a permanent chief is found. The automaker’s losses in Europe have totaled $16.4 billion since 1999.

GM plunged 40 percent since its November 2010 initial public offering through July 27. GM reorganized under a U.S.-backed bankruptcy in 2009 and the U.S. still holds a 32 percentstake.

SMYRNA, Tenn. — The dairy farms that once draped the countryside here were paved over so the Japanese carmaker Nissan could build its first American assembly plant. Eighty miles to the south, another green pasture was replaced by a Nissan engine factory, and across Tennessee about 100 Nissan suppliers dot the landscape, making steel in Murfreesboro, air conditioning units in Lewisburg, transmission parts in Portland.

Three decades ago, none of this existed. The conventional wisdom at the time was simple: Japanese automakers would not build many cars anywhere but Japan, where supply chains were in place, costs were tightly controlled and the reputation for quality was unparalleled.

“They were very unfamiliar doing anything outside Japan,” said Senator Lamar Alexander, a Republican who was governor of Tennessee when Nissan opened its factory here in 1983. “They were tentative and awkward even discussing it.”

Today, echoes of that conventional wisdom can be heard within the American technology industry. For years, high-tech executives have argued that the United States cannot compete in making the most popular electronic devices. Companies like Apple, Dell and Hewlett-Packard, which rely on huge Asian factories, assert that many types of manufacturing would be too costly and inefficient in America. Only overseas, they have said, can they find an abundance of educated midlevel engineers, low-wage workers and at-the-ready suppliers.

But the migration of Japanese auto manufacturing to the United States over the last 30 years offers a case study in how the unlikeliest of transformations can unfold. Despite the decline of American car companies, the United States today remains one of the top auto manufacturers and employers in the world. Japanese and other foreign companies account for more than 40 percent of cars built in the United States, employing about 95,000 people directly and hundreds of thousands more among parts suppliers.

The United States gained these jobs through a combination of public and Congressional pressure on Japan, “voluntary” quotas on car exports from Japan and incentives like tax breaks that encouraged Japanese automakers to build factories in America. Pressuring technology companies to move manufacturing here would pose different challenges. For one thing, Apple and many other technology giants are American, not foreign, and so are viewed differently by politicians and the public. But it is possible and the benefits might be worth it, some economists say.

“The U.S. has a long history of demanding that companies build here if they want to sell here, because it jump-starts industries,” said Clyde V. Prestowitz Jr., a senior trade official in the Reagan administration who helped negotiate with Japan in the 1980s. The government could also encourage domestic production of technologies, including display manufacturing and advanced semiconductor fabrication, that would nurture new industries. “Instead, we let those jobs go to Asia, and then the supply chains follow, and then R&D follows, and soon it makes sense to build everything overseas,” he said. “If Apple or Congress wanted to make the valuable parts of the iPhone in America, it wouldn’t be hard.”

One country has recently succeeded at forcing technology jobs to relocate. Last year, Brazilian politicians used subsidies and the threat of continued high tariffs on imports to persuade Foxconn — which makes smartphones and computers in Asia for dozens of technology companies — to start producing iPhones, iPads and other devices in a factory north of São Paulo. Today, the new plant has 1,000 workers, and could employ many more. Apple and Foxconn declined to comment about the specifics of their Brazilian manufacturing.

However, a developing country like Brazil can adopt trade policies that would be difficult for the United States. Taking a hard line to reduce imports of technology goods and encourage domestic manufacturing could violate international trade agreements and set off a trade confrontation. “We’re a long way from even talking about limits on imported iPhones or iPads,” said a former high-ranking Obama administration official who did not want to be named because he was not authorized to speak.

Protectionism is bad policy in today’s globalized world, many economists argue. Countries benefit most when they concentrate on what they do best, and trade barriers harm consumers by driving up prices and undermine a nation’s competitiveness by shielding industries from market forces that spur innovation. The United States needs to create new jobs, economists say, but it should not chase low-paid electronics assembly work that at some point may be replaced by robots. Instead, it should focus on higher-paying jobs.

“Closing our border is a 20th-century thought, and it will only weaken the economy over the long term,” said Andrew N. Liveris, president of Dow Chemical and co-chairman of the Advanced Manufacturing Partnership, a group of executives and academics convened by the White House who have studied ways to encourage domestic manufacturing.

The debate is not just economic, however. Increasingly, it is political. With high unemployment, the question of how to create jobs has taken a role in the presidential race between President Obama and Mitt Romney, and both have traded barbs on outsourcing by American companies.

Although the car and technology industries are different — and the eras are separated by 30 years — the resurgence of American auto manufacturing in the 1980s is an example of how one industry created tens of thousands of good jobs. Since its first pickup truck rolled off the line here on June 16, 1983, Nissan has produced more than seven million vehicles in the United States. It now employs 15,000 people in this country. It makes more than a half-million cars, trucks and S.U.V.’s a year, with the plant in Smyrna building six models, including the soon-to-be-produced, all-electric Nissan Leaf.

Other foreign carmakers settled in America: Honda, Toyota, Hyundai, BMW, Mercedes-Benz and, most recently, Volkswagen — after a failed attempt decades ago. And some of those factories have become among the best in the world. The Nissan engine plant in Decherd, Tenn., for instance, exports engines to Japan. “We have 14 companies now that produce light vehicles here and that is enormous,” said Thomas Klier, a senior economist at the Federal Reserve Bank in Chicago. “There is no major market in the world that compares to it.”

Tennessee?

“Where is Tennessee?”

It was a blunt question, posed by Takashi Ishihara, president of Nissan, to Mr. Alexander, then the state’s governor.

Mr. Alexander, who had journeyed to Tokyo in 1979 to pitch Nissan on building a plant in his state, was ready with his answer: “I said, It’s right in the middle.” To help out, he displayed a satellite photograph of the United States at night, showing the bright lights shining on the East and West Coasts and the relative darkness of Tennessee.

“We were the third-poorest state in the nation back then,” Mr. Alexander said. “President Carter had told all the U.S. governors to go to Japan and persuade the Japanese to make in the U.S. what they sell in the U.S.”

Mr. Alexander recalled the Nissan executives were “incredibly anxious” about testing their homegrown production systems abroad. Could the Japanese car companies achieve the same quality using American workers?

Despite the concerns, pressures were growing for Nissan to break out of its manufacturing cocoon in Japan, including currency fluctuations that made exporting more expensive. The final push came from American anger as imports grabbed one-fourth of the United States market.

“Japanese automakers had achieved rapid growth by exporting to America,” said Hidetoshi Imazu, a senior manufacturing executive at Nissan in Tokyo who led the development of the plant here in its early years. “But it was clear that model would no longer work.”

In the fall of 1980, Congress held hearings to limit Japanese imports. With tension running high, Nissan announced plans for the $300 million assembly plant in Smyrna. That gave the company a head start in circumventing looming restrictions. In May 1981, Japan agreed to limit exports to America to 1.68 million cars annually, a 7 percent reduction from a year earlier. In addition, the United States imposed a 25 percent tax on imported pickup trucks.

“The pressure put on the Japanese was absolutely critical for them to agree to export restraints,” said Stephen D. Cohen, a professor emeritus of international studies at American University.

Rural Tennessee may not have seemed a likely place to build a giant automotive factory, but its location was actually a selling point. It was far from Detroit and the United Auto Workers — and the Japanese wanted to work without what they saw as union interference.

Nissan’s choice of Tennessee was not popular with everyone. On a 20-degree February morning in 1981, trade unionists jeered Mr. Alexander and Nissan executives as they turned the first shovelfuls of dirt for the factory, protesting nonunion construction crews. An airplane circled overhead urging a boycott of Japanese vehicles.

Standing nearby was Marvin Runyon, a 37-year veteran of Ford who had been recruited as Nissan’s first American plant manager. In a later interview with The New York Times, Mr. Runyon was asked what his old colleagues in Detroit thought of his new job. “They wish me luck,” he said. “But not too much.”

Success did not come overnight. Many Japanese were skeptical of their new colleagues. Americans, they had heard, were soft, lazy and incapable of mastering the precision manufacturing that had made Nissan great.

To train its new American engineers, Nissan flew workers to its Zama factory in eastern Japan. There the Nissan officials, assisted by English-speaking Japanese workers called “communication helpers,” imparted the intricacies of the company’s production techniques to the Americans.

Beginnings at Nissan

Early on, Nissan guarded against quality concerns by not relying on parts from American suppliers. Most components were either shipped from Japan or produced by Japanese companies that set up operations nearby. “We felt sourcing parts on the U.S. wouldn’t allow us to make cars in our own way,” said Mr. Imazu, the Nissan manufacturing executive.

By 1985, Nissan was confident enough about the quality that it added passenger cars to Smyrna’s assembly lines. Gradually, American parts makers were allowed to bid on supply contracts. Even that came amid arm-twisting by Congress, which passed a law in 1992 requiring auto makes to inform consumers of the percentage of parts in United States-made cars that came from North America, Asia or elsewhere.

Calsonic Kansei of Tokyo opened its first plant in Tennessee in the mid-1980s, and now employs about 2,600 Americans making instrument panels, exhaust systems, and heating and cooling modules for Nissan. “The Japanese suppliers were encouraged to localize production,” said Matt Mulliniks, vice president for sales and marketing at Calsonic Kansei in Tennessee.

Nissan’s early doubts are reflected in recent debates over whether American workers can compete with overseas laborers. Within the technology industry, workers in Asia are viewed as hungrier and more willing to tolerate harsh work schedules to achieve productivity. The numbingly repetitive jobs of assembling cellphones and tablet computers, executives say, would be scorned here; they worry that many Americans will not make the sacrifices that success demands, and want too much vacation time and predictable work schedules.

In the auto industry, the belief that American workers could not match Japanese workers has long since faded. “A big part of the reluctance of Japanese automakers to come to the U.S. was the belief that their manufacturing systems could only work with loyal Japanese employees,” said Mr. Cohen, the American University professor. “Everybody was surprised how quickly the systems were adopted here.”

This year, Nissan held an internal competition to decide where to produce a new Infiniti-brand luxury sport utility vehicle. The plant in Smyrna was vying against one in Japan.

The surprising winner: Smyrna.

“All my life I’ve heard about how great luxury brands like Lexus and BMW are,” said Richard Soloman, a 20-year veteran at the Smyrna plant. “Now we will be building a vehicle of that standard right here in Tennessee.”

The Japanese presence has rippled through the South. But no place has benefited to the extent of Tennessee, which counts more than 60,000 jobs related to automobile and parts production. The state’s jobless rate, which exceeded the national average by a significant margin in 1983 when Nissan opened its plant, is now lower — 7.9 percent in May versus 8.2 percent nationwide.

Brazil’s Breakthrough

Earlier this year, when Apple’s chief executive, Tim Cook, took the stage at a technology conference, he was asked if his company — which once made computers in America, but now locates most assembly in China and other countries — would ever build another product in the United States.

“I hope so,” Mr. Cook replied. “One day.”

That day came recently for Brazil.

In Jundiaí, an hour’s drive from São Paulo, a strip of asphalt has recently been rechristened Avenida Steve Jobs, or Steve Jobs Avenue. Alongside is a factory where workers make iPhones and iPads. Brazil got these jobs through tactics the United States once used to persuade Nissan and other foreign carmakers to build plants in America: it cajoled Apple and Foxconn with a combination of financial incentives and import penalties.

Like the United States, Brazil is a big market — the third largest for computers after China and the United States. It has long imposed tariffs on imported technology products to encourage domestic manufacturing. Those fees mean that smartphones and laptops often cost consumers more in Brazil — and that domestic manufacturers can be at a disadvantage if their products require imported parts.

In April 2011, Brazil’s president, Dilma Rousseff, traveled to Asia with a pitch — much as Mr. Alexander did in 1979. The federal government would give Foxconn tax breaks, subsidized loans and special access through customs and lower tariffs for imported parts if it started assembling Apple products in Brazil, where Foxconn was already producing electronics for Dell, Sony and Hewlett-Packard.

Foxconn agreed. Within months, new Brazilian engineers were flying to China for training. By year’s end, Foxconn was making iPhones in Jundiaí, and it began making iPads there in early 2012, according to Evandro Oliveira Santos, director of the Jundiaí Metalworkers Union, whose members work at the plant. Stores now carry Apple products with the inscription “Fabricado no Brasil” — “Made in Brazil.”

Apple products remain expensive; the latest iPad, for instance, costs about $760 in Brazil, compared with $499 in the United States. But because those devices are made in Brazil, and lower tariffs are charged on parts used to assemble them, Foxconn and Apple are pocketing larger shares of the profits, analysts say, offsetting the increased costs of building outside China.

Foxconn declined to discuss specific customers, but said the Brazilian government’s incentive programs had influenced its decisions and that the company expected to generate more Brazilian jobs, as well as aid the government’s goal of furthering the country’s technology industries.

Indeed, Brazil hopes that compelling Foxconn to assemble iPhones and iPads domestically will help set off a technology explosion. Ms. Rousseff has said that Foxconn could invest $12 billion more in Brazil. And as an electronics supply chain develops within the country — as it has in China — the expectation is that other manufacturers will build factories.

The government also hopes to use consumer electronics as a springboard for more advanced manufacturing. Targeting high-tech parts like computer displays and semiconductors could help Brazil reduce its trade deficit in these products, and develop a robust homegrown industry, said Virgilio Almeida, information technology secretary at the Ministry of Science and Technology. “They are deemed high priority in the Brazilian industrial policy, and are part of the Greater Brazil Plan,” he said. “Brazil has developed specific policies that grant incentives to foment research, development and industrial production.”

America’s Gap

Throughout his term, Mr. Obama has regularly gathered advisers to discuss manufacturing, according to former high-ranking White House officials. As one meeting was breaking up, Mr. Obama casually tapped an aide’s iPhone to raise a point. Since the device is designed domestically, he said, it should be possible to make them in this country as well.

But it became clear at the meetings that there were differences of opinion over how best to bring manufacturing home, according to people familiar with the discussions who did not want to be named because the sessions were private. Everyone shared the same goal: establishing a level playing field and creating as many jobs in America as possible. But the debate centered, in part, on choosing among different tactics the American government has used in the past: penalties like tariffs against foreign countries that do not play by the rules or incentives like tax breaks to encourage more domestic manufacturing. On one side were officials like Ron Bloom, until earlier this year the president’s senior counselor for manufacturing policy, who favored more aggressive stances to counter policies used by Asian countries. He argued that the United States should fight China’s efforts to keep its currency weak. If China’s currency were stronger, American companies might find it costlier to make their goods in China and could have greater incentive to manufacture more in this country.

Aligned on the other side at times were two powerful voices, Lawrence H. Summers, the top economic adviser to Mr. Obama until 2010, and Treasury Secretary Timothy F. Geithner. Along with many economists, Mr. Summers argued that an overly aggressive trade stance could hurt manufacturing — by, for instance, pushing up the price of imported steel used by carmakers — and over time, drive companies away.

Mr. Geithner thought diplomacy was more effective than confrontational tactics like labeling China a currency manipulator. “He told us, ‘It’s going to be a trade war if we go there,’ ” according to a person who attended the meetings. But this person countered that China would respond only to pressure. “What doesn’t work is the quiet stuff,” he said.

Mr. Summers, in a recent interview, declined to discuss his role at the White House. But, speaking more broadly, he said protectionist measures might incite new domestic manufacturing in the short run, but it would come at a high price. “People will pay more for the product because it’s produced in a place that can’t make it at the lowest cost,” he said. “It burdens exporters because they pay more for their inputs. And it removes the spur of competition.”

A spokeswoman for Mr. Geithner said that “a multidimensional approach to tough yet smart engagement with China is the most effective way to level the playing field.” This strategy has had some success in persuading China to increase the value of its currency, she noted.

One of the president’s economic advisers also said that, despite some differences, Mr. Obama’s team, including Mr. Geithner and Mr. Summers, united to preserve manufacturing jobs in a critical area, by bailing out the auto industry in the wake of the financial crisis.

But the divisions within the White House have often frustrated those who wanted a sharper focus on manufacturing. “The critics would say we didn’t really fight for manufacturing policy,” said another former high-ranking official who took part in many of those meetings. “They have a strong point.”

Now, with unemployment high and a growing debate over outsourcing of jobs, manufacturing is on the political agenda. In March, Gene B. Sperling, director of the White House’s National Economic Council, outlined initiatives — including tax breaks for building factories here, infrastructure investments and going after “unfair trade practices” — to reinvigorate manufacturing. In May, the Commerce Department announced tariffs on Chinese solar panels for selling below fair-market value. The White House has challenged China’s trade practices on tires and rare-earth metals, and has established an “interagency trade enforcement center” to combat unfair trade.

Washington, however, has generally shied from addressing the protectionist measures of countries like China with countermeasures, as politicians once did against Japan.

After the Senate last year passed legislation imposing tariffs on nations whose currency is undervalued — a salvo aimed at China — the bill went nowhere in the House of Representatives, and the White House indicated it did not like the proposal.

However, champions of “in-sourcing” legislation — which takes away benefits from companies moving jobs abroad and provides incentives for those bringing jobs back — said the tenor of the debate is changing. “The public by and large has been betrayed by large American corporations that outsource. I think Congress is catching on to that,” said Senator Sherrod Brown, Democrat of Ohio.

Still, he does not advocate tariffs or quotas. Senator Debbie Stabenow, Democrat of Michigan, also favors tax breaks, rather than penalties. “I love my iPad,” she said. “And I want it made in America.”

One reason for the difference today: Unlike in the 1980s, when Japanese auto imports upset many voters, there has been little public outcry over imported cellphones and computers.

Back then, American workers were losing jobs as imports from Japanese companies cut into sales of the Big Three automakers.

But consumer electronics are different. Though some jobs have moved to Asia, many were never here to begin with. And the biggest technology importers — like Apple, Hewlett-Packard, Dell and Microsoft — are American companies.

Today, many consumers do not know or care where their smartphones are made. “Where it was built, what it means for politics, how it affects the economy,” said Raymond Stata, a founder of Analog Devices, one of the largest semiconductor manufacturers, “that’s not something people think about when they buy.”

Emails obtained by The Daily Caller show that the U.S. Treasury Department, led by Timothy Geithner, was the driving force behind terminating the pensions of 20,000 salaried retirees at the Delphi auto parts manufacturing company.

The move, made in 2009 while the Obama administration implemented its auto bailout plan, appears to have been made solely because those retirees were not members of labor unions.

The internal government emails contradict sworn testimony, in federal court and before Congress, given by several Obama administration figures. They also indicate that the administration misled lawmakers and the courts about the sequence of events surrounding the termination of those non-union pensions, and that administration figures violated federal law.

Delphi, a General Motors company, is one of the world’s largest automotive parts manufacturers. Twenty thousand of its workers lost nearly their entire pensions when the government bailed out GM. At the same time, Delphi employees who were members of the United Auto Workers union saw their pensions topped off and made whole.

The White House and Treasury Department have consistently maintained that the Pension Benefit Guaranty Corporation (PBGC) independently made the decision to terminate the 20,000 non-union Delphi workers’ pension plan. The PBGC is a federal government agency that handles private-sector pension benefits issues. Its charter calls for independent representation of pension beneficiaries’ interests.

Former Treasury official Matthew Feldman and former White House auto czar Ron Bloom, both key members of the Presidential Task Force on the Auto Industry during the GM bailout, have testified under oath that the PBGC, not the administration, led the effort to terminate the non-union Delphi workers’ pension plan.

“As a result of the Delphi Corporation bankruptcy, for example, Delphi and the Pension Benefit Guaranty Corporation were forced to terminate Delphi’s pension plans, which means there are Delphi retirees who unfortunately will collect less than their full pension benefits,” Feldman testified on July 11, 2012.